The Palin test for FinReg

I don't like to disagree with Paul Krugman about financial regulation, but I think it's actually a bit too pessimistic to sigh that "no system will work once President Palin gets to appoint the Secretary of the Treasury and the chairman of the Fed." Most systems won't work in that scenario. But some will!

In particular, the Federal Deposit Insurance Corporation will still work. Those are the folks we created in the aftermath of the Great Depression to insure your bank deposits. And what's interesting about their structure is that they are totally automatic and universal: It doesn't matter if President Palin's nominee to head the Federal Reserve thinks the banks are in tip-top shape and markets are proving themselves to be straight magic. The FDIC still insures your deposit. And that's why we no longer have consumers bank runs in this country. It's why nobody lined up outside Citibank even when it seemed like they might collapse.

You can't fully protect against the problem of bad regulators. But if you're seriously trying to fix the financial system, your proposals have to assume bad or complicit regulators. That, after all, is what you see in a massive bubble, and what we saw in the run-up to the recent crisis. If Alan Greenspan or Ben Bernanke had thought we were going down the tubes, they could've stopped it. But they didn't think that. They thought all was well. So the question is how you create a system that pushes against bubble mentalities. And the answer we came up with during the Great Depression is you don't give regulators that much discretion.

The FDIC works whether Bernanke thinks it necessary or not. And that's the reason it works. A regulatory system that's meant to prevent to prevent crises but requires powerful regulators to see the crises on the horizon will not work. In fact, this is a pretty good way to evaluate various FinReg proposals: How well do they work if Sarah Palin is president?

I love Palin. I'd vote for her. My state would probably go for her. But she wouldn't win the nomination (I think she'd have a better chance at the presidency than the Republican nomination) and she wouldn't win the presidency. She is not electable.

It's much more likely that she's going to be appointed Secretary of the Treasury, or Secretary of Labor, or a similarly prestigious cabinet position, under a future Republican president.

Krugman needs to be speculating about how things would work under a President Romney or a President Scott Brown. Because something like that might still actually happen.

"It's much more likely that she's going to be appointed Secretary of the Treasury, or Secretary of Labor...."

I find that highly unlikely. A Bush-style appointment would be ambassador to the UN or administrator of the EPA. You know, things Republicans would just as soon see vandalized.

Neither Mitt Romney nor Scott Brown (nor, of course, Sarah Palin) will ever be President. The last time around, I thought McCain was the only plausible candidate in the Republican field. Now that he's ruled out (I mean, he was too old then) what have they got? Nude models, Mormon hypocrites and liars, gay former governors, insane people (I mean you, Rudy!), and clueless but relentless self-promoters who know nothing but supposedly can field-dress a moose?

"Krugman needs to be speculating about how things would work under a President Romney or a President Scott Brown. Because something like that might still actually happen. "

Exactly. Palin may say crazy things to stay relevant, but people like Krugman comment on her because she brings in the "hits" or ratings or whatever. I mean, she should be referred to as "Fox News contributor Palin," not president.

I still think of Romney as some Manchurian candidate, only instead of some secret crazed communist, he'd be Mark Warner -- a smart executive type. Too bad his party's totally nuts.

---The FDIC works whether Bernanke thinks it necessary or not. And that's the reason it works.---

It works, only if you focus on what is readily apparent, and ignore side effects.

With so called guaranteed deposits, the incentives for people to investigate their banks before hiring them are reduced. Bank managers are likewise lightened of burdens of due diligence, as are regulators. In effect, it's a corruption of the market that will exacerbate the normal corrective mechanisms of same when the crunch of the next bursting bubble does come.

And the FDIC is about out of money, isn't it? Just like the rest of the government?

Re FDIC, Ezra, please explain sometime how its deposit insurance is funded. My understanding is that banks are charged some premium depending on their eligible deposits. Well, now that we the people are on the hook for all the deposits and counter-parties 'way above the insurance ceiling, shouldn't banks be paying premiums on ALL their deposits, 'cuz either FDIC or the Fed is going to bail out those big-ticket depositors?

Even though we have the FDIC, I'm not so sure that we don't have bank runs anymore... I mean, there was the series that the Pugent Sounds Business Journal ran on the last days of Washington Mutual and I remember bits about how the ATMs had to be stocked with more than twice its usual amount of money for withdrawals and locally, I certainly remember people lining up outside of IndyMac on the days before its demise.

Certainly, the fundamentals are different and in the case of IndyMac, the run came _after_ its collapse but the run on Washington Mutual certainly contributed partially to its ultimate demise.

"In particular, the Federal Deposit Insurance Corporation will still work."

This is just a stupid statement. Klein must be forgetting the following:

"On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013. This extension of the temporary $250,000 coverage limit became effective immediately upon the President's signature. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014." --

Would a President Palin have signed that bill into law? What would have happened to consumer confidence had she not? What will happen once the temporary $250,000 limit drops back down to $100,000? Would a president Palin seek permanent increases? Many questions, many variables, many scenarios. Not all of them pretty.

Blindness will get you nowhere examining these sorts of hypotheticals.